On August 3, 2020, the Federal Financial Institutions Examination Council (“FFIEC”) issued a joint statement to provide prudent risk management and consumer protection principles for financial institutions to consider when working with borrowers as consumer and business loans near the end of initial loan accommodation periods during the coronavirus pandemic. The guidance notes that the principles outlined in the joint statement apply to both commercial and retail loan accommodations and are consistent with the Interagency Guidelines Establishing Standards for Safety and Soundness. Furthermore, the principles are intended to be tailored to a financial institution’s size, complexity and loan portfolio risk profile, as well as the industry and business focus of its customers or members.
The joint statement recognizes the significant adverse impact that the COVID-19 crisis has had on consumers, businesses, financial institutions, and the U.S. economy. The Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES Act”) provided several forms of financial relief to businesses and individual borrowers, and some states and localities have provided similar credit accommodations. Many financial institutions have also offered voluntary credit accommodations to borrowers.
The FFIEC members reiterate their prior guidance, the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (revised) dated April 7, 2020 (“Interagency Statement on Loan Modifications”), that encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual loan payment obligations because of COVID-19. Specifically, that guidance stated that loan accommodations are generally viewed as positive actions that can mitigate adverse impacts on borrowers.
The joint statement notes that while some borrowers will be able to resume contractual payments at the end of an accommodation, others may be unable to do so due to continuing financial challenges. The FFIEC members encourage financial institutions to consider prudent accommodation options that are based on an understanding of the borrower’s credit risk, consistent with applicable laws and regulations, and designed to ease cash flow pressures on affected borrowers while improving their capacity to service debt and facilitating a financial institution’s ability to collect on its loans. Such arrangements may mitigate long-term borrower financial impacts by avoiding delinquencies or other adverse consequences.
FFIEC members encourage financial institutions to observe several risk management and consumer protection principles to work with borrowers in a safe and sound manner as loans near the end of accommodation periods, as described below. Importantly, the guidance recommends that financial institutions should ensure that clear, accurate and timely information is provided to both borrowers and guarantors regarding any accommodation.